Tuesday, September 10, 2013

The IMF and The Economist (re)discover the Prebisch-Singer Hypothesis

Free Exchange, one of the The Economist's blogs, had a post recently on the secular declining prices of commodities. The post suggest that there is significant evidence in favor of the Prebisch-Singer Hypothesis (PSH), based on an IMF paper (available here).

Note that the notion that there is something correct about the Prebisch-Singer Hypothesis is not really news. José Antonio Ocampo has written several papers recently (see here and here) showing that overall terms of trade for commodity producers did not go well, particularly in two periods the 1930s, and the 1980s, which drive the negative long-term trend. But it is true, as we noted with Esteban Perez (see here), that many respectable authors still suggest that PSH must be wrong.

Note that while Prebisch did read Marx, and early in his life he considered himself a Socialist, it is far from clear that he can be referred to as Marxist, or suggest that PSH is a Marxist theory (for more on Prebisch see this review of his recently published biography). In fact, many interpretations are compatible and sometimes based in neoclassical suppositions.

Prebisch actually defended the idea of declining terms of trade in a way that is really compatible with classical (meaning surplus approach and Marx) views on long-term price determination. He suggested in his famous 1949 paper that the cause of tendency of commodity prices to fall with respect to manufactured goods prices was related to wage setting in the center and periphery.

In the boom wages went up in the center, but not so much in the periphery, since industrial workers in the center were organized and could demand higher salaries, while that was not possible for the agricultural and mining workers in the periphery. In the recession, in turn, while wages fell in the periphery, they did not in the center. It was the fall in wages in the periphery, associated to the weak labor force that led to lower prices of commodities. Class conflict, and not just technological change (or patterns of demand, as in some explanations of PSH), was at the heart of the asymmetries between the center and the periphery.

Hence, industrialization in the periphery, and the re-organization of the labor force, would imply that more workers in the periphery would be able to keep part of the benefits of higher productivity. Industrialization would be good for the production of the commodity sector, since prices of commodities would go up, with higher wages in the periphery. [For more on Prebisch's views go here]. Note that the classical explanation for long-term prices can be used to explain periods in which the trend for commodity prices was positive too [see for example this video of a talk by Franklin Serrano here].

Funny thing is that Free Exchange, after noting that PHS might be correct, published another post here in which they argue that Free Trade is still the best policy, because:

"the persistence in economic history of the idea that free trade provides the optimal long-run conditions for growth may be a better reason than any other why The Economist still supports free trade today— just as it did 170 years ago."

I will not get again into the problems with Free Trade (you can go here and here), but obviously if in the long-term specialization in commodities does not tend to be a good idea, a trade policy that leads to that pattern of specialization cannot be defended. At least not in a coherent fashion!